Palm oil stockpile shrank by 1.0% MoM to 1.82m tonnes in Nov-21, dragged by lower output (-5.3%) and higher exports (+3.3%). Moving into Dec-21, we believe slower exports to China (arising from seasonal factor mentioned as above) and India (on the back of higher vegetable oil stockpile) will be mitigated by seasonally lower palm production cycle (exacerbated by the onset of La Nina episode). Maintain 2021-23 CPO price assumptions of RM4,250/3,500/2,900 per tonne. We maintain our OVERWEIGHT stance on the sector, underpinned by good near term earnings prospects (arising from high CPO prices) and commendable valuations. Top picks are IOI Corp (BUY; TP: RM4.35), KLK (BUY; TP: RM25.62), Sime Darby Plantation (BUY; TP: RM5.03), and TSH Resources (BUY; TP: RM1.35).

DATA HIGHLIGHTS

Stockpile declined on lower output and higher exports. Palm oil stockpile shrank by 1.0% MoM to 1.82m tonnes in Nov-21, dragged by lower output (-5.3%) and higher exports (+3.3%). The stockpile surpassed Bloomberg consensus median estimate of 1.78m tonnes, as lower-than-expected exports (as a result of high shipping costs) more than offset lower-than-expected output.

Output fell 5.3% MoM on seasonal factor. Output fell 5.3% MoM to 1.63m tonnes in Nov-21, seasonally lower palm production cycle kicks in. On yoy basis, output advanced by 9.6%, due to a shift in cropping pattern. On cumulative basis, output fell 6.4% to 16.7m tonnes during the first 11 months of 2021, dragged mainly by labour shortfall arising from border closure (due to Covid -19 pandemic).

Exports: higher exports to India and EU more than mitigated lower exports to China. Total exports rose 3.3% MoM to 1.47m tonnes in Nov-21, as higher exports to India and EU more than mitigated lower exports to China (as winter season typically slows palm oil demand from China) and Pakistan.

HLIB’s VIEW

Forecast. Moving into Dec-21, we believe slower exports to China (arising from seasonal factor mentioned as above) and India (on the back of higher vegetable oil stockpile) will be mitigated by seasonally lower palm production cycle (exarcebated by the onset of La Nina episode). Maintain 2021-23 CPO price assumptions of RM4,250/3,500/2,900 per tonne. We believe CPO price will stay lofty in the near term, on the back of (i) near term supply constraints, and (ii) the onset of La Nina episode, which has a 95% chance lasting through Feb-22, according to US Climate Prediction Center). A more noticeably decline in CPO price will only happen when supplies of vegetable oil (in particular, palm oil and soyben) start showing signs of recovery (possibly by 2Q22), in our view.

Maintain OVERWEIGHT. We maintain our OVERWEIGHT stance on the sector, underpinned by good near term earnings prospects (arising from high CPO prices) and commendable valuations. Top picks are IOI Corp (BUY; TP: RM4.35), KLK (BUY; TP: RM25.62), Sime Darby Plantation (BUY; TP: RM5.03), and TSH Resources (BUY; TP: RM1.35).

Source: Hong Leong Investment Bank Research - 13 Dec 2021